Sens. David Vitter (R-La.) and Sherrod Brown (D-Ohio) recently announced they plan to introduce the Terminating Bailouts for Taxpayer Fairness Act, which would prevent a single financial institution from becoming so large its failure may require a bailout.
“The truth, according to the markets, is that ‘too big to fail’ is alive and well with the Wall Street megabanks,” Vitter said. “Our number one goal is to protect the taxpayers from financial risks, and the best way to do this is by implementing a systemic solution, increasing the minimum amount of capital the mega banks are required to have.”
After receiving a massive taxpayer-funded federal bailout in 2008, America’s four largest institutions, including Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, have nearly doubled in size since the financial crisis.
Many industry experts point to an implicit government guarantee for institutions deemed by regulators as “too big to fail,” which allows megabanks to borrow at a lower rate than smaller institutions.
A study released by the FDIC last year found that “the largest banks do, in fact, pay less for comparable deposits [than smaller institutions],” adding the risk premium gap is “consistent with an economically significant ‘too-big-to-fail’ subsidy paid to the largest banks.”
Brown and Vitter’s legislation would also set capital standards based on the size and complexity of a financial institution to ensure its stability during a period of economic stress.
Mid-sized and regional banks would be required to hold eight percent in capital, while megabanks—institutions with $500 billion or more in assets—would be required to hold 15 percent in capital. Community banks would be unaffected by the legislation.
The legislation would also limit the federal safety net to traditional banking operations, thereby providing protection to commercial banks instead of investment banks that engage in risk activities.
Additionally, the legislation expands the definition of “rural” lenders that offer balloon mortgages, eliminates some capital-raising obstacles facing some smaller institutions, establishes an independent bank examiner ombudsman to allow institutions to appeal the outcome of an exam and adopts privacy notice reforms.